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Financial crisis foretold 70 years earlier?

Excerpt from article by Jason Zweig (WSJ online).

Decades before anybody had ever heard of a mortgage derivative, an economist named Melchior Palyi predicted key causes of the 2008-2009 financial crisis with precision that makes a modern reader's hair stand on end.

The seeds of today's problem were planted long ago, and its forgotten history holds important lessons. In 1936, as part of reforms under the new Banking Act, the U.S. government mandated that federally regulated banks could no longer hold securities that weren't rated investment-grade by at least two ratings firms.

The economists from the Federal Reserve Bank of New York used to mumble about stuff like that in the 1980's while I temped for them. That is why they were the cheapest in salaries towards their workers. They knew all along is was going to happen.....

Answer by
Anonymous
at 2:32 PM on Nov. 9, 2010

You would think that we would learn from the past in order to avoid the same mistakes in the future.

Mr. Palyi warned in 1938 that a push toward universal home ownership would "make the population fixed to the ground" by "overburdening them with housing costs." That, he foresaw, would limit the mobility of American workers—helping explain why unemployment is so stubbornly high today.

Link to full article: http://online.wsj.com/article/SB10001424052748704405704575596382345085258.html?mod=WSJ_PersonalFinance_PF4